Federal regulators have found that improper market-timing at San Mateo-based Franklin Resources Inc. extended beyond the arrangement with a single Las Vegas broker highlighted this week byMassachusetts authorities, a Securities and Exchange Commission official said Thursday.
Franklin, the No. 4 mutual fund company by assets and now the largest to be charged in the mutual fund scandal, is in settlement talks with the SEC and an agreement is expected to be finalized within weeks, the official said, speaking on condition of anonymity.
In a civil complaint filed Wednesday, Massachusetts securities regulators described an arrangement in which Franklin, which operates the Franklin Templeton brand, allegedly allowed Las Vegas broker Daniel Calugar to market time $45 million in exchange for a $10 million hedge fund investment.
Market timing is not illegal, but Massachusetts authorities contend Franklin committed fraud by turning a blind eye to the practice despite promises to other customers not to tolerate it. Market-timing can skim profits from long-term investors.
The official declined to provide details of what the SEC has found, but said the SEC’s investigation was “much broader” than Massachusetts Secretary of State William Galvin’s.
“It documents market timing beyond one guy in Las Vegas,” the official said.
Franklin had previously disclosed it was being investigated by the SEC, state authorities in California, New York and Massachusetts, and federal prosecutors in California and Massachusetts.
In a message to shareholders posted earlier this month, Franklin said an internal inquiry had uncovered “various instances of frequent trading where we have questions about the propriety of what occurred.”
In a statement released Wednesday, Franklin said it was confident no investors were harmed by the investments described in the Massachusetts complaint, and that it was cooperating with investigators and continuing discussions with the SEC.
A Franklin spokeswoman said Thursday the company would have no further comment.
The complaint filed Wednesday by the Massachusetts Securities Division alleges top Franklin officials were complicit in the arrangements with Calugar, who had already been accused by the SEC of earning $175 million from improper trading in mutual funds managed by Alliance Capital Management and Massachusetts Financial Services.
Ralph Kessler, a former SEC enforcement attorney now in private practice in New York, said this type of arrangement likely raised particular alarm bells for regulators because it more clearly profited fund companies.
Such arrangements lead “to a dollars and cents benefit which resonates with the public and the Commission,” Kessler said. “It’s not a hypothetical type of advantage which is harder to quantify.”
Franklin’s legal troubles are the latest in the improper fund trading scandal that has quickly spread across the $7 trillion fund industry. The investigation by state and federal authorities has expanded to dozens of other fund companies including Alliance, Invesco Funds Group, Putnam Investments, Strong Investments and Prudential Securities. In December, Alliance agreed to $600 million in settlements with state and federal regulators over charges of improper trading.
Franklin is the No. 4 fund company in assets behind Fidelity Investments, Vanguard Group and American Funds, according to Financial Research Corp.
